Q. I am looking to retire in June 2020 when I will be 66 years old. I am self-employed and my current Super balance is around $200,000. I have a personal share portfolio that I have owned for years now worth around $135,000 with substantial capital gains of around $90,000. I would like to invest these funds into Super but I am in no rush to do so until I retire as I would trigger substantial Capital Gains Tax (CGT) liabilities. I have been able to make deductible contributions to Super of $20,000 each of the past two financial years. Will the announced changes in the Federal Budget to the work test be of benefit to me?
A. Currently, individuals aged 65 to 74 must work a minimum of 40 hours in a consecutive 30 day period within a financial year in order to be eligible to make contributions to Superannuation. This is referred to as the Work Test.
Under the proposed changes, from 1 July 2019, people aged 65 to 74 with a total Superannuation balance below $300,000 will be able to make voluntary Superannuation contributions for 12 months from the end of the financial year in which they last met the Work Test. In other words, the Work Test will not apply to making Superannuation contributions in the financial year after they cease work.
The current Concessional Superannuation cap of $25,000 and Non-Concessional Superannuation contribution cap of $100,000 in a financial year will continue to apply.
Assuming you retire on 30 June 2020 and are older than 65, you would be able to sell your shares in the financial year after you retire and contribute these funds to Superannuation. The main advantage would be crystalizing the capital gain in the new financial year when you most likely will have lower taxable income. The capital gain triggered by the sale of the shares can be offset by a personal deductible contribution to Super. The deductible portion will count against your Concessional Contribution Cap. Please note you would need to make the contribution on or before 30 June 2021.
As your Superannuation balance is likely to be less than $500,000 at 30 June 2020, you will also be able to utilise the Concessional Contribution “catch up” provisions. This concession allows you to carry forward any unused Concessional Contribution Cap for up to 5 years from 1 July 2018. So assuming you continue to contribute $20,000 until retirement, you would be eligible to claim a Personal Superannuation Tax deduction of $35,000 in the 2020-21 tax year when you sell your shares. This represents the $25,000 Concessional contribution cap applicable to the 2020-21 tax year plus $10,000 representing the unused Concessional Contribution cap from the previous two financial years.
As an individual, 50% of a Capital gain is taxed at your marginal tax rates. Your Personal Deductible Superannuation contribution of $35,000 should offset the CGT liability on the sale of shares, assuming you have little or no other taxable income in the 2020-21 tax year. Contributions Tax of 15% would still apply to the $35,000 contribution.
In total, you would be able to contribute $135,000 to Superannuation. $100,000 would count against your Non-Concessional Cap of $100,000 and $35,000 would count against your Concessional Contribution Cap incorporating $10,000 under the Concessional Contribution carry forward rules.
Please note under the current Superannuation rules, you would not be able to make contributions to Superannuation after 30 June 2020 unless you satisfied the work test of a minimum of 40 hours in a consecutive 30 day period within a financial year.
If the legislation for the Budget announcement does not get passed, you would be obliged to satisfy the work test and therefore have additional taxable income in the financial year prior to making the contributions.
Either way, this strategy provides substantial tax savings and greater contributions to Superannuation for retirement planning purposes.